Which rate should the company use to discount capital

Reference no: EM13619976

Dale Corporation has two independent projects in which it can invest. The initial cost of the project S is $26,000, and the initial cost of the project F is $63,000. The expected income streams from these projects are found in the table below. The risks of both projects are similar to the risks of current company projects. The current risk-free rate is 0.57% and the market risk premium (return to the market minus the risk-free rate) is expected to be 6.00% per year. The company's beta is 1.55. The company will be raising all cash for these projects through debt. The company expects to pay 1.03% for any debt used in the project(s). The target capital structure for the company is 40% equity and 60% debt. The marginal tax rate is 40%.

Expected Cash Flows by Project
Project S		Project F
Year 1	7,500		14,382
Year 2	6,614		5,526
Year 3	3,110		9,072
Year 4	5,498		17,918
Year 5	7,394		10,140
Year 6	1,528		8,320
Year 7	4,704		17,696
Year 8	5,220		14,988

a) What is the firm's weighted average cost of capital?

b) Which rate should the company use to discount capital projects (such as NPV) in this case?

c) What is the net present value (NPV) for each project?

d) What is the payback period for each project?

e) What is the internal rate of return (IRR) for each project?

f) Which project(s) should the company adopt to maximize the value of the firm? Briefly describe why you selected that (those) project(s)?

Reference no: EM13619976

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